HOEPA Covered Loans

two hands that are on covering a figure of a small house, illustrating HOEPA covered loans coverage.

HOEPA, or the Home Ownership and Equity Protection Act, protects homeowners when they refinance or get home equity loans. The law attempts to prevent unfair practices from lenders who offer home equity loans.

There is a section of the law, “section 32,” which mandates certain requirements for loans with high interest rates or fees. Accordingly, these loans are sometimes called “Section 32 Mortgages.”

HOEPA Covered Loans

HOEPA covers loans that meet specific criteria:

  • The original mortgage has an APR that is 8 or more points higher than Treasury security rates.
  • A second mortgage has an APR that is 10 or more points higher than Treasury security rates.
  • The total amount payable to the lender before closing (fees and points) is greater than 8% of the loan amount, or $625, whichever is larger.
A home loan sign next to stacks of coins by a model house depicting types of loan assistance available.

Forbidden HOEPA Covered Loans

  • Most kinds of balloon payments are forbidden.
  • Adding unpaid interest to the principal, increasing the balance of the loan (“negative amortization”).
  • Higher default interest rates than the pre-default rate.
  • Borrowers must not be required to pay more than 2 regular payments in advance from the loan proceeds.
  • There are specific limits to prepayment penalties under HOEPA Covered Loans.
  • Loans made without considering the borrower’s ability to repay the loan.
  • Disbursements of loan proceeds to anyone but the borrower (or jointly to the borrower and contractor in certain home improvement loans).
  • Refinancing into a new HOEPA loan from an existing HOEPA loan within one year of originating the loan.
  • A high-rate loan under HOEPA may not be set up as a Home Equity Line of Credit (HELOC) if it is really a closed-ended loan.

Not covered under HOEPA

  • New home construction loans.
  • New Mortgages to purchase a home.
  • Reverse Mortgages.
  • Home Equity Lines of Credit.

The goal of HOEPA is to protect you from deceptive practices when refinancing or getting a home equity loan. Before you agree to any such loan, talk to our HUD-approved housing counselor to be sure your loan meets all of the legal criteria. We can help you make sure you are making an informed decision and getting all of the legal protection you deserve.

If you need help with credit or debt, or want to learn more about budgeting or personal finance, get started with free, confidential counseling and education right here at Credit.org.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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